Germany – To which product category do Cannabidiol spray products belong?

30 November 2024

  • Germany
  • Distribution
  • Pharmaceutical Law

When selling health-related products, the question frequently arises as to which product category, and therefore which regulatory regime, they fall under. This question often arises when distinguishing between food supplements and medicinal products. But in other constellations, too, difficult questions of demarcation arise, which must be answered with a view to legally compliant marketing.

In a highly interesting case, the Administrative Court (Verwaltungsgericht) of Düsseldorf, Germany, recently had to classify a CBD-containing (Cannabidiol) mouth spray that was explicitly advertised by its manufacturer as a “cosmetic” and therefore not suitable for human consumption. The Ingredients of the product were labelled: « Cannabis sativa seed oil, cannabidiol from cannabis extract, tincture or resin, cannabis sativa leaf extract ».

The Product is additionally also labelled as follows: “Cosmetic oral care spray with hemp leaf extract. » The Instructions for use are: « Spray a maximum of 3 sprays a day into the mouth as desired. Spit out after 30 seconds and do not swallow. »

A spray of the Product contains 10 mg CBD. This results in a maximum daily dose of 30 mg CBD as specified by the company.

At the same time, however, it was pointed out that the “consumption” of a spray shot was harmless to health.

The mouth spray could therefore be consumed like a food, but was declared as a “cosmetic”. This is precisely where the court had to examine whether the prohibition order based on food law was lawful.

For the definition of cosmetic products Article 2 sentence 4 lit. e) Regulation (EC) No. 178/2002 refers to Directive 76/768/EEC. This was replaced by Regulation (EC) No. 1223/2009. Cosmetic products are defined in Article 2(1)(a) as follows: “‘cosmetic product’ means any substance or mixture intended to be placed in contact with the external parts of the human body (epidermis, hair system, nails, lips and external genital organs) or with the teeth and the mucous membranes of the oral cavity with a view exclusively or mainly to cleaning them, perfuming them, changing their appearance, protecting them, keeping them in good condition or correcting body odours ”.

Here too, it is not the composition of the product that is decisive, but its intended purpose, which is to be determined on the basis of objective criteria according to general public opinion based on concrete evidence.

According to the system of Regulation (EC) No. 178/2002, Article 2 sentence 1 first defines foodstuffs in general and then excludes cosmetic products under sentence 4 lit. e). According to the definition in Regulation (EC) No. 1223/2009, cosmetic products must have an exclusive or at least predominant cosmetic purpose. It can be concluded from this system that the exclusivity or predominance must be positively established. If it is not possible to determine which purpose predominates, the product is a foodstuff.

The Düsseldorf Administrative Court had to deal with this question in the aforementioned legal dispute brought by the distributor against an official prohibition order in the form of a so-called general ruling („Allgemeinverfügung“). By notice dated July 11, 2020, the competent authority issued a general ruling prohibiting the marketing of foodstuffs containing “cannabidiol (as ‘CBD isolates’ or ‘hemp extracts enriched with CBD’)” in their urban area. The company, based in this city, offered the mouth spray described above.

In a ruling dated 25.10.2024 (Courts Ref. : 26 K 2072/23), the court dismissed the company’s claim. The court’s main arguments were :

  1. Classification as food: the CBD spray was correctly classified as food by the authority, as it was reasonable to expect that it could be swallowed despite indications to the contrary. According to an objective perception of the market, there is a now established expectation of an average informed, attentive and reasonable consumer to the effect that CBD oils are intended as “lifestyle” products for oral ingestion, from which consumers hope for positive health effects The labelling as “cosmetic” was refuted by the objective consumer expectations and the nature of the application.
  2. No medicinal product status: Due to the low dosage in this case (max. 30 mg CBD per day), the product was not classified as a functional medicinal product, as there was no sufficiently proven pharmacological effect.
  3. Legal basis of the injunction: The prohibition of the sale of the products by the defendant was based on a general order, which was confirmed as lawful by the court.

In the ruling, the court emphasizes the objective consumer expectation and clarifies that products cannot be exempted from a different regulatory classification by the authorities or the courts solely by their labelling.

Conclusion: The decision presented underlines the considerable importance of the “correct” classification of a health product in the respective legal product category. In addition to the classic distinction between foodstuffs (food supplements) and medicinal products, comparable issues also arise with other product types. In this case in the constellation of cosmetics versus food – combined with the special legal component of the use of CBD.

Quick Summary: In Germany, on termination of a distribution contract, distribution intermediaries (especially distributors / franchisees) may claim an indemnity from their manufacturer / supplier if their position is similar to that of commercial agents. This is the case if the distribution intermediary is integrated into the supplier’s sales organization and obliged to transfer its customer base to the supplier, i.e. to transmit its customer data, so that the supplier can immediately and without further ado make use of the advantages of the customer base at the end of the contract. A recent court decision now aims at extending the distributor’s right to indemnity also to cases where the supplier in any way benefited from the business relationship with the distributor, even where the distributor did not provide the customer data to the supplier. This article explains the situation and gives tips on how to overcome the ambiguity that this new decision brings with it.

A German court has recently widened the distributor’s right to goodwill indemnity at termination: Suppliers might even have to pay indemnity if the distributor was not obliged to transfer the customer base to the supplier. Instead, any goodwill provided could suffice – understood as substantial benefits the supplier can, after termination, derive from the business relationship with the distributor, regardless of what the parties have stipulated in the distribution agreement.

The decision may impact all businesses where products are sold through distributors (and franchisees, see below) – particularly in retail (especially for electronics, cosmetics, jewelry, and sometimes fashion), car and wholesale trade. Distributors are self-employed, independent contractors who sell and promote the products

  • on a regular basis and in their own name (differently from commercial agents),
  • on their own account (differently from commission agents),
  • thus bearing the sales risk, for which – in return – their margins are rather high.

Under German law, distributors are less protected than commercial agents. However, even distributors and commission agents (see here) are entitled to claim indemnity at termination if two prerequisites are given, namely if the distributor or the commission agent is

  • integrated into the supplier’s sales organization (more than a pure reseller); and
  • obliged (contractually or factually) to forward customer data to the supplier during or at termination of the contract (German Federal Court, 26 November 1997, Case No. VIII ZR 283/96).

Now, the Regional Court of Nuremberg-Fürth has established that the second prerequisite shall already be fulfilled if the distributor has provided the supplier with goodwill:

“… the only decisive factor, in the sense of an analogy, is whether the defendant (the principal) has benefited from the business relationship with the plaintiff (distributor). …

… the principal owes an indemnity if he has a “goodwill”, i.e. a justified profit expectation, from the business relationships with customers created by the distributor.”

(Decision of 27 November 2018, Case no. 2 HK O 10103/12).

To support this wider approach, the court abstractly referred to the opinion by the EU advocate general in the case Marchon/Karaszkiewicz, rendered on 10 September 2015. That case, however, did not concern distributors, but the commercial agent’s entitlement to an indemnity, specifically the concept of “new customers” under the Commercial Agency Directive 86/653/EEC.

In the present case, it would, according to the court, suffice that the supplier had the data on the customers generated by the distributor on his computer and could freely make use of them. Other cases where the distributor indemnity might arise, even regardless of the concrete customer data, would be cases where the supplier takes over the store from the distributor, with the consequence of customers continuing to visit the very store also after the distributor has left.

Practical tips:

1. The decision makes the legal situation with distributors / franchisees less clear. The court’s wider approach needs, however, to be seen in the light of the Federal Court’s case law: The court still in 2015 denied a distributor the indemnity, arguing that the second prerequisite was missing, i.e. that the distributor was not obliged to forward the customer data (decision of 5 February 2015, case no. VII ZR 315/13, following its earlier decision re Toyota, 17 April 1996, case no. VIII ZR 5/95). Moreover, the Federal Court also denied franchisees the right to indemnity where the franchise concerns anonymous bulk business and customers continue to be regular customers only de facto (decision of 5 February 2015, case no. VII ZR 109/13 re bakery chain “Kamps”). It remains to be seen how the case law develops.

2. In any case, suppliers should, before entering the German market, consider whether they are willing to take that risk of having to pay indemnity at termination.

3. The same applies to franchisors: franchisees will likely be able to claim indemnity based on analogue application of commercial agency law. Until today, the German Federal Court of Justice has denied the franchisee’s indemnity claim in the single case and therefore left open whether franchisees in general could claim such indemnity (e.g. decision of 23 July 1997, case no. VIII ZR 134/96 re Benetton stores). Nevertheless, German courts could quite likely affirm the claim in the case of distribution franchising (where the franchisee buys the products from the franchisor), provided the situation is similar to distributorship and commercial agency. This could be the case where the franchisee has been entrusted with the distribution of the franchisor’s products and the franchisor alone is entitled, after termination of contract, to access the customers newly acquired by the franchisee during the contract (cf. German Federal Court, decision of 29 April 2010, Case No. I ZR 3/09, Joop). No indemnity, however, can be claimed where

  • the franchise concerns anonymous bulk business and customers continue to be regular customers only de facto (decision of 5 February 2015 re the bakery chain “Kamps”);
  • or production franchising (bottling contracts, etc.) where the franchisor or licensor is not active in the very sector of products distributed by the franchisee / licensee (decision of 29 April 2010, Case No. I ZR 3/09, Joop).

4. The German indemnity for distributors – or potentially for franchisees – can still be avoided by:

  • choosing another law that does not provide for an indemnity;
  • obliging the supplier to block, stop using and, if necessary, delete such customer data at termination (German Federal Court, decision of 5 February 2015, case no. VII ZR 315/13: “Subject to the provisions set out in Section [●] below, the supplier shall block the data provided by the distributor after termination of the distributor’s participation in the customer service, cease their use and delete them upon the distributor’s request.“). Though such contractual provision appears to be irrelevant according to the above decision by the Court of Nuremberg, the court does not provide any argument why the established Federal Court’s case law should not apply any more;
  • explicitly contracting the indemnity out, which, however, may work only if (i) the distributor acts outside the EEA and (ii) there is no mandatory local law providing for such indemnity (see the article here).

5. Further, if the supplier deliberately accepts to pay the indemnity in return for a solid customer base with perhaps highly usable data (in compliance with the EU General Data Protection Regulation), the supplier can agree with the distributor on “entry fees” to mitigate the obligation. The payment of such entry fees or contract fees could be deferred until termination and then offset against the distributor’s claim for indemnity.

6. The distributor’s goodwill indemnity is calculated on basis of the margins made with new customers brought by the distributor or with existing customers where the distributor has significantly increased the business. The exact calculation can be quite sophisticated and German courts apply different calculation methods. In total, it may amount up to the past years’ average annual margin the distributor made with such customers.

The legal form of a GmbH (limited liability company) is very popular in Germany and is also one of the most frequently chosen forms of market entry for foreign investors. Its establishment is relatively simple and quick, the GmbH offers shareholders the desired limitation of liability and enjoys a high reputation in business relations, both in Germany and abroad. The statutory minimum share capital of 25,000 euros documents a certain seriousness and is intended to protect creditors.

However, the opening of a German bank account to which the shareholders are to pay their capital contributions is usually a factual problem when setting up a GmbH; the capital stock must be provided before the company is registered in the German commercial register. On the one hand, it is not uncommon for German financial institutions to refuse to open accounts to foreign shareholders per se. On the other hand, it is almost standard today that the opening of a bank account for a new company in which foreign shareholders are to hold shares can take several weeks for various internal bank reasons. In practice, this means that the entry of the company in the commercial register can be suspended for several weeks or even months. Valuable time is lost, especially if you are about to start a project in Germany and everything is already prepared.

Do you have to accept this unnecessary delay? No, not at all.

There is a much faster and more acceptable way.

A bank account is not required for the establishment of a GmbH. The German corporate law does not provide for this either. In practice, however, it has become common to open an account directly when a company is established. Of course, this only makes sense if the account is opened quickly and immediately. If, however, it is foreseeable in advance that there might be problems opening an account with a German bank, a different procedure is recommended.

The managing director of the newly established GmbH (he is usually already appointed during the notarial establishment of the company) has to assure in the registration of the new company to the commercial register that the capital contributions are in the free and unrestricted disposal of the management. The law does not stipulate that this can only take place if the payment is made to a bank account of the GmbH. It is also possible and permissible for the managing director to opens a company cash box (cash register) in which the shareholders hand over the capital contributions in cash and the managing director notes the payment in the cash book. A copy of the cash book or a confirmation of the managing director can be handed over to the notary as proof of the payment, who then also forwards this copy to the commercial register.

In the incorporation practice and experience of the author, this procedure has so far been accepted by the commercial registers without objection. All GmbHs founded in this way were successfully registered.

The author of this post is Dominik Wagner.

To create a homogeneous franchise system where all franchisees have to comply with the same requirements, franchisors typically use standard form franchise contracts – i.e. contracts pre-formulated drafted and provided by the franchisor for a multiple number of franchisees.

Within Germany, such franchise contracts have to comply with the quite strict German laws on standard form contracts (even in B2B). As a rule of thumb, such standard form contracts must be reasonable in order to be valid. Vice versa, they are void if they unreasonably disadvantage the franchisee, especially if

  • they are not compatible with essential principles of law, or
  • restrict essential rights or duties arising from the nature of the franchise contract to such an extent that the contractual purpose is endangered.

The same goes for handbooks, guidelines or other manuals: they all qualify as standard form contracts under German law (sec. 305 (1) German Civil Code [“BGB”]).

Moreover, franchise contracts must not excessively restrict the franchisee’s economic freedom. Worst case risk – as recently reconfirmed by the Federal Court –: the entire franchise contract is void!

“A franchise agreement is null and void in its entirety because of infringing sec. 138 BGB if the franchisee’s economic freedom is excessively impaired due to a large number of provisions which advantage the franchisor unilaterally and disadvantage the franchisee, for which no even approximately appropriate compensation is granted to the franchisee (…). This requires an overall assessment of the contractual agreement and the circumstances leading to the conclusion of the contract. Indications of an immoral gagging of the franchisee may be a provision with stipulates the franchisor’s authority to collect debts, thus enabling the franchisor to redirect payments to the franchisor, as well as contractual provisions restricting the franchisee’s economic freedom beyond what is typical for such a distribution system.”

(Decision of 11.10.2018, Case No. VII ZR 298/17, para. 17 [own translation] – regarding a “licensing contract” for realtors).

Practical advice

  1. This new decision by the Federal Court confirms the rather restrictive, rather franchisee-friendly decisions handed down by German courts in the past (e.g. the Federal Court’s Decision on fast food chains of 12.11.1986, Case No. VIII ZR 280/85, para. 10).
  2. To minimize the risk of invalidity, franchisors ideally observe the relevant statutory requirements on standard form contracts and the relevant case law on franchise contracts. According to the latest decision above, special care should be taken when the franchise contract provides for the franchisor’s power to collect debts. A way out could be the choice of another law – if the franchisor is based outside Germany (cf. Art. 3 Rome-I-Regulation).
  3. For guidance on franchisors’ advertising and pricing campaigns and compliance with antitrust law, check out the article “Franchise systems: ad campaigns with low prices can come costly!”.

Franchisors may run ad campaigns with low prices. Such campaigns, however, can come costly if they have an anticompetitive effect, especially if they factually force the franchisees to offer the products for the low prices.

Best example: pricing campaigns for the “burger of the week”, as decided by the Munich Regional Court in its decision of 26 October 2018 (Case No. 37 O 10335/15).

The situation

The plaintiffs are franchisees of the defendant’s franchise network, a restaurant chain. In addition to the obligation to pay “royalties” in return for the use of the franchise systems and its trade marks (5%), the franchise agreements also obliged the franchisees to pay a sales-related advertising fee. The defendant and franchisor used the advertising fees of the franchisees, among others, to advertise products from the plaintiffs’ menu at low prices, e.g. under the slogan “King of the Month“. By participating in the advertising campaigns and its low prices, the sales of the franchisees increased and thus the franchise fee they had to pay. After some time, the franchisees decided that this advertising campaign caused them financial damage – because the products offered for a low price affected the sale of products offered at a normal price (“cannibalism effect”). They no longer participated in the campaign and demanded an appropriate reduction of their advertising fee. Among other things, they brought an action for an injunction against the use of the advertising fee for the campaign complained of and for a declaratory judgment of the liability to pay damages. The Regional Court granted both motions.

The main reason. The advertising campaigns had the effect of restricting competition, namely the franchisees’ ability to determine their sale prices (contrary to sec. 1 and 2 (2) German Act against Restraints of Competition and Art. 2 (1), Art. 4 a) Vertical Block Exemption Regulation). After all, the franchisor set – so the court – the resale price through the de facto binding effect of the ad campaign.

The decision stands in line with the previous case law, especially of the German Federal Court’s decisions on low-price campaigns by franchisors of

  • self-drive rental vehicles (“Sixt ./. Budget”, 02.02.1999, Case No. KZR 11/97, para.30),
  • pet food (“Fressnapf”, 04.02.2016, Case No. I ZR 194/14, para. 14), and
  • glasses within a dual distribution system where the franchisor sold the products through its own branches and through franchisees without differentiating between branch and franchise operations (“Apollo Optik”, 20.05.2003, Case No. KZR 27/02, para. 37).

Practical tips

  1. Obligations that are essential for running the franchise system do not restrict competition for the purposes of the EU antitrust rules (similar to the US law’s “ancillary restraints doctrine”). In particular, the following restrictions are typically indispensable components of a functioning franchise agreement:
  • Restrictions of the transfer of know-how;
  • Non-compete obligations (during and after the term of the agreement), prohibiting the franchisee from opening a shop of the same or similar nature in an area where he may compete with other members of the franchise network;
  • Obligations of the franchisee not to transfer his shop without the franchisor’s prior approval.

(cf. EU Court of Justice, 28.01.1986, Case “Pronuptia”, Case No. 161/84 para. 16. 17).

  1. However, franchise systems are not per se exempted from the prohibition of restricting competition. Therefore, watch out to comply with the EU antitrust rules to avoid painful fines and ensure that the franchise agreement can be enforced.
  2. The prohibition of price-fixing (or Resale Price Maintenance) applies to the relationship between franchisor and franchisee if the franchisee bears the economic risk of its enterprise. To avoid that an ad campaign with recommended resale prices constitutes an anticompetitive price-fixing, the concrete situation needs to be assessed thoroughly. What helps to avoid also any factual binding effect:
  • Add a clarifying note: “Only at participating restaurants in … . As long as stocks last.”
  • Ensure that such note is clearly visible, e.g. by adding an asterisk “*” to the price.
  • Avoid any measures that could be interpreted as pressure or incentive for the franchisees and which would turn the recommended price into a fixed price (e.g. because other pricing would otherwise lead to negative evaluations).
  1. Such ad campaigns may work, as a UK court’s decision shows: According to the BBC, Burger King franchisees sued the franchisor in 2009 “because a corporate promotion required franchisees to sell a double cheeseburger for $1 that cost a $1.10 to make. The court ruled for Burger King.” Under the above circumstances and also for short-term promotions, franchisors may even impose the resale price – such campaigns just need to be well prepared.
  2. For an overview on resale price maintenance, see the Legalmondo article Resale Price Maintenance and Exceptions for short-term promotions.
  3. Resale Price Maintenance can come costly – in 2018, the European Commission imposed fines of EUR 111 million in total on four consumer electronics manufacturers – Asus, Denon & Marantz, Philips and Pioneer – for fixing online resale prices (cf. the Press release of 24 July2018).

“Luxury goods justify online sales bans” on third party platforms – as stated in the press release no. 30/2018 of the Higher Regional Court of Frankfurt of July 12, 2018. After the long-awaited Coty-ruling of the ECJ (see the article of December 2017, https://www.legalmondo.com/2017/12/eu-court-justice-allows-online-sales-restrictions-coty-case/), the Higher Regional Court of Frankfurt has now applied the ECJ’s guidelines to Coty’s ban of sales via third party platforms and declared it effective – which was actually expected (I). Other high-quality goods – also outside the luxury segment – can justify platforms bans as well – at least this was decided by the Court of Appeal of Hamburg with regard to an eBay ban (II.). The article ends with some practical conclusions (III.).

Luxury products justify platform bans

According to the judgment of the Frankfurt Court of Appeal, Coty can prohibit the distributor from selling its products via third party platforms. Based on Coty’s wording in the selective distribution agreement, however, any distributor is free to establish advertising cooperations with third party platforms, where customers are redirected to the distributor’s own online shop. According to the judgment, the online marketplace ban is already admissible under the EU Vertical Block Exemption Regulation, since it does not constitute a hardcore restriction. The distribution ban could possibly even be exempted from the cartel prohibition, in the field of selective distribution; in this case, it would only be doubtful whether the prohibition of all “sales cooperation with a third party platform, outwardly recognisable from others, regardless of its concrete structure, would be a reasonable mean for the intended aim” (translated text from the original German version), i.e. whether it would be proportionate or whether there would be other means, less interfering with the dealer’s competitiveness. This question was left open by the Court.

Also other high-quality goods may allow platform bans

The case decided by the Hamburg Higher Regional Court (decision of March 22, 2018, file no. 3 U 250/16) concerns a qualitative selective distribution system for food supplements and cosmetics, which runs via the so-called network marketing, as well as via internet. The distribution guidelines contain, among other things, specific indications regarding the distributor’s website, the contact possibilities for customers in accordance with the “principle of personal sales of goods” (since the distribution system aims to sell the product tailored to the customers’ personal needs based on personal advice), as well as the quality of information and the product presentation. The “distribution … via eBay and comparable e-commerce platforms” is expressly prohibited, as it does not meet the quality requirements, at least not “according to the current state” (translated text from the original German version).

The Court of First Instance considered the platform ban to be admissible (District Court of Hamburg, judgment of November 4, 2016, Case No. 315 O 396/15) – which has now been confirmed by the Higher Regional Court of Hamburg. This is because qualitative selective distribution systems are not only admissible for luxury goods and high-technology goods, but also for (other) high-quality goods, “if the goods sold are high-quality and the distribution is combined with parallel customer consulting and support services, with the aim, among other things, of illustrating to the customer an overall sophisticated, high-quality and upscale end product and building up or maintaining a specific product image” (translated text from the original German version).

Within such a selective distribution system for the distribution of food supplements and cosmetics, it could then be admissible “to prohibit the distribution partners, by means of suitable company guidelines, from selling those goods via a specific online sales platform, in order to preserve the product image and the related practice of customer-binding support, as well as to prevent product- and image-damaging business practices of single distribution partners as occurred and consequently pursued in the past” (translated text from the original German version).

The peculiarity here was that they were not “pure prestige products” and, moreover, the Hamburg Higher Regional Court did not limit itself to the – in view of the market shares readily feasible – verification that the platform under Article 2 of the Vertical Block Exemption Regulation was admissible. Rather, the Court vividly and precisely declined the so-called Metro criteria.

Practical conclusions

  1. The Internet remains a growth driver for consumer goods, as also the market data from the German Trade Association confirm: “E-commerce remains a growth driver“.
  2. At the same time, brand manufacturers in particular want growth to be regulated according to the rules of their distribution system and to their requirements. These include, especially for luxury and technically sophisticated products, as well as other products requiring intensive assistance, strict specifications regarding brand identity and advertising appearance (specifications regarding brick store clauses, marketplace bans) and the services to be offered (e.g. chat and / or hotline with information on availability).
  3. Manufacturers should check whether their platform bans comply with ECJ’s requirements or if they wish to impose platform bans – in selective, exclusive, franchise and open distribution.
  4. Who wants to take as little risk as possible, should remain cautious with platform bans outside the selective distribution of luxury goods. In its first reaction, also the Federal Cartel Authority (BKartA, short for “Bundeskartellamt”) declared that the Coty-ruling should apply exclusively to original luxury products: “#Brand manufacturers still have no carte blanche on #platform bans. First assessment: “Limited impact on our practice” (BKartA on Twitter, December 6, 2017). Nevertheless, the European Commission has now spoken against this: in its Competition Policy Brief of April 2018 (“EU competition rules and marketplace bans: Where do we stand after the Coty judgment?), the European Commission states – rather incidentally – that the argumentation of the ECJ in the Coty case should also apply regardless of the luxury character of the distributed products:

„The arguments provided by the Court are valid irrespective of the product category concerned (i.e. luxury goods in the case at hand) and are equally applicable to non-luxury products. Whether a platform ban has the object of restricting the territory into which, or the customers to whom the distributor can sell the products or whether it limits the distributor’s passive sales can logically not depend on the nature of the product concerned.“

In fact, the ECJ has broadly defined “luxury goods” in its judgment: namely as goods whose quality is “not just the result of their material characteristics” but of intangible values – which is usually the case for branded goods (see the Coty-judgment of the ECJ of December 6, 2017, para. 25 and, with regard to “quality goods”, the conclusion of the EU Advocate General of July 26, 2017, para. 92). Furthermore, the ECJ only requests that the goods be bought “also” because of their prestige character, not “alone” or “above all” because of it. In conclusion, a lot of aspects suggest that all brand manufacturers can include platform bans in their distribution agreements – at least in case of market shares up to max. 30%.

  1. Those who are not afraid of confrontations with dealers and antitrust authorities can definitely impose platform bans outside the selective distribution of luxury goods as well – or increasingly rely on premium products and luxury – such as at the perfumery chain Douglas (see the Süddeutsche Zeitung of March 8, 2018, p. 15: “Active and unconventional, Tina Müller ends discounts on Douglas and aims at luxury“).
  2. To ensure consistent quality of sales, specific quality targets are recommended, especially for online sales. The list of possible quality targets is very long. The specifications that have proven to be best practice concern in particular:

– the positioning as a retailer (platform, product range, communication)

– the design of the website (quality, look & feel, etc.)

– the content and product offer of the website,

– the processing of online purchases,

– the consulting and customer service, as well as

– the advertisement.

  1. It is also essential to note that manufacturers are not allowed to totally prohibit distributors from selling online; nor are sales requirements allowed to amount to such a total ban – as the Courts now see in the case of Ascis’ ban of price comparison engines (to this regard, see the following article from April 2018: https://www.legalmondo.com/2018/04/germany-ban-of-price-comparison-engines-and-advertising-on-third-party-platforms/).
  2. Further details can be found in German in the following Law Journals:

– Rohrßen, Vertriebsvorgaben im E-Commerce 2018: Praxisüberblick und Folgen des „Coty“-Urteils des EuGH, in: GRUR-Prax 2018, 39-41;

– Rohrßen, Internetvertrieb von Markenartikeln: Zulässigkeit von Plattform-verboten nach dem EuGH-Urteil Coty, in: DB 2018, 300-306;

– Rohrßen, Internetvertrieb: „Nicht Ideal(o)“ – Kombination aus Preissuchma-schinen-Verbot und Logo-Klausel, in: ZVertriebsR 2018, 120-123;

– Rohrßen, Internetvertrieb nach Coty – Von Markenware, Beauty und Luxus: Plattformverbote, Preisvergleichsmaschinen und Geoblocking, in: ZVertriebsR 2018, 277-285.

On 1 January, the new Packaging Act (“Verpackungsgesetz”) will replace the existing Packaging Ordinance (“Verpackungsverordnung”). Non-compliance with the new rules may have very unpleasant consequences.

For those who sell packaged goods to end consumers in Germany it is high noon: they have to adapt to the new packaging law, which comes into force on January 1, 2019.

The main objective of the new law is that in the future all concerned parties will have to take responsibility and bear the costs of disposing their packaging. The legislator also wants to achieve the increase of the recycling rate of paper, plastic, metal or glass packaging, and to use as many readily recyclable materials as possible. Therefore, the fee that producers or distributors must pay for disposal will in future not only depend on the quantity and material type, but also more on the recyclability of the packaging.

Who is affected by this law?

Manufacturers, online dealers and distributors of packaged goods of all kinds.

Affected are all so-called initial distributors of packaging, which typically end up at the private end consumer. These can be manufacturers, online dealers and distributors of packaged goods of all kinds, whether food, electrical appliances or furniture.

All of them, if they place packaging on the market for the first time, must register with one of the dual systems already today and, depending on the quantity and material of the packaging waste, pay a participation fee to the German take-back system.

It is new from next year on that they additionally have to register with the Central Agency Packaging Register and specify the amount of waste.

This information will be publicly available. By doing so, the legislator wants to create transparency and ensure that all those who place “packaging” on the market fulfill their obligations.

Also new is that the fees, which so far have been simply calculated according to quantity and type of material, should in future also depend on how well a material can be recycled.

For example: Cardboard boxes, which usually consist of two-thirds of waste paper, are easily recyclable, as are aluminium cans, which can be reused to 100 percent. By contrast, the notorious coffee-to-go cups are not recyclable because they consist of a quasi-inseparable composite material.

How exactly the gradations will look is not yet certain, as the dual systems still work on the implementation.

Further innovations for beverage manufacturers and distributors

The law contains several other changes that are particularly important for beverage manufacturers and distributors. The compulsory deposit for disposable containers will be extended to include a few types of beverages that were previously exempted, such as carbonated fruit and vegetable nectars. A new duty has been introduced for retailers, who must point out “with clearly visible signs” on disposable and reusable beverage packaging.As from 1st of January 2019 companies must also file the so-called Declaration of Compliance (“Vollstaendigkeitserklaerung”) with the Central Agency Packaging Register and not anymore with the respective local Chamber of Industry and Commerce.

What is the Declaration of Compliance?

A Declaration of Compliance is a verification concerning the volumes of sales packaging placed into the market by a manufacturer / distributor within one calendar year.

The filing of the Declaration of Compliance, however, only affects larger manufacturers, since the de minimis limits are set quite high in this respect. For paper, cardboard or carton it is about 80 tons per year.

Pre-registration is already possible as from September 2018. It is important to note, however, that every company involved in the system must perform the registration and data reporting “personally”, meaning that this process may not be transferred to third parties.

The respective database run by the Central Agency Packaging Register is called LUCID. Manufacturers, online dealers or initial distributors who preregister with LUCID will receive a provisional registration number, which will be sent to the Dual system with which they can sign a contract. There are currently nine companies offering this. Manufacturers who preregister in 2018 will automatically receive a registration confirmation from the Central Agency Packaging Register at the beginning of 2019. The registration including the indication of quantities is free and can be done online.

The Central Agency Packaging Register is also responsible to monitor compliance with the regulations. However, at the end of the day, everyone can check the respective compliance as LUCID is a transparent register and open to everyone to search the register for specific manufacturers and brands.

The law explains why this can have quite unpleasant consequences:

In case the registration is omitted, there is automatically a ban on distribution of the packaging and there is a threat of fines to be imposed which may range up to 100.000 €! Due to the publicity of the register, agents not complying with the law may have to expect that their goods will be discontinued in the German trade.

Still unclear issues

The definition of packaging covered by this law is not quite clear. Transport packaging such as that used by a manufacturer for delivery to the dealer and disposed of there, for example, is not affected by the obligation to participate at the system and the new registration obligation. This packaging does not end up at the private end consumer. But what about wine boxes, for example? They are often only transport packaging, but some customers may take a whole box of their favorite wine with them. In addition, hotels and restaurants, such as those supplied by a retailer, are considered by law to be private end consumers.

The author of this post is Olga Dimopoulou

Commercial agents are very suitable for expanding one’s business into new markets – especially for two reasons: First, because they generally have a good expertise of the market (especially if they reside in that country). Second, because their remuneration (“commission”) can be configurated completely profit-oriented (= remunerated only if they successfully negotiate a new transaction), and related to the turnover they generate.

Nevertheless, both the supplier and the commercial agent may feel the need for an initial period, in which both get to know each other, the product, the market and the customers as good as possible to subsequently evaluate how to proceed on that market. Therefore, they may agree on a trial period within which the commercial agency contract can be terminated more easily and sooner than without or after such trial period, e.g.:

“This Agreement shall come into effect on [●] and shall be in force for a trial period of [●] months (“Trial Period”) during which each Party can terminate the Agreement with [●] months written notice. After such Trial Period, the Agreement shall continue indefinitely, unless terminated according to the rules below.”

Even if the agency agreement is terminated within such trial period, however, the agent may be entitled to indemnity or compensation – as the Court of Justice of the EU just now confirmed (Case Conseils et mise en relations (CMR) SARL, decision of 19 April 2018, C-645/16).

The court basically argues with the wording, context and objective of the Commercial Agency Directive:

  • The Commercial Agency Directive also applies to ‘”trial periods”.
  • Ending a commercial agency contract – even within an agreed trial period – constitutes a “termination” of the agency contract, which triggers the claims for indemnity or compensation – because the commercial agency contract has already been definitively concluded (understanding contrary to French case law, e.g. Cour de Cassation, Case No. 14-17894).
  • Goodwill indemnity or compensation are not forfeited because termination within the trial period is not included in the exhaustive list of exceptions in Article 18 Commercial Agency Directive.
  • The parties may derogate from the commercial agent’s mandatory rights only from the end of the contract (Article 19 Commercial Agency Directive) because the Commercial Agency Directive aims to protect the commercial agent vis-à-vis the principal (recital 2 of the Commercial Agency Directive).

Practical tips

  1. Parties are free to agree on trial periods because it is covered by freedom of contract.
  2. At termination, the commercial agent is, as a matter of principle, entitled to an indemnity or compensation – to “indemnify the agent for his past services from which the principal will continue to benefit beyond the termination”, as the EU Court of Justice now put it. Whether the agent can claim indemnity or compensation depends on the law chosen by the parties (or, in absence of choice, by the law of the country where the commercial agent has his habitual residence).
  3. As far as the indemnity (payable e.g. according to German law) is concerned, its amount strongly depends on the commercial agent’s performance during the term of the contract – because the claim accrues if and to the extent that (i) the agent has brought the principal new customers or (ii) has significantly increased the business with existing customers and (iii) the principal continues to derive substantial benefits from such business, plus (iv) such indemnity must be equitable. As a maximum, the indemnity shall not exceed of the past five years’ average annual remuneration (including commissions and other payments). Such possible costs should therefore be included in one’s business planning before starting to distribute products or services through commercial agents.
  4. Throughout the EU, agency agreements are widespread in a vast variety of industries: roughly 740,000 commercial agents operate for 1.7 million companies and generate sales of EUR 260 billion. These figures from 2012 keep growing as indicate Eurostat’s data, reported by the European Commission in its Refit Evaluation. The EU Member States with the most commercial agents are Slovakia (35k) Czech Republic (42k), Germany (42k), France (50k), Spain (50k) and – by far – Italy (220k). If the agent operates outside the European Economic Area, Principals and commercial agents are free to derogate even from the otherwise mandatory Commercial Agency Directive, especially if German law is chosen. For details, please see the article “Commercial Agents outside the EEA – No Goodwill Indemnity (Ingmar reloaded)”.
  5. Alternatively, one can also do business through distributors or franchisees or other intermediaries – where, however, an indemnity may arise at well, especially vis-à-vis distributors. For details, see the article “German Distributor Indemnity – How to avoid it”.

Matthia Hesshaus

Practice areas

  • Administrative Law
  • Antitrust
  • Pharmaceutical Law
Contact Matthia

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    Germany – Distribution, Franchise Agreements and Goodwill Indemnity at Termination

    24 February 2020

    • Germany
    • Distribution

    When selling health-related products, the question frequently arises as to which product category, and therefore which regulatory regime, they fall under. This question often arises when distinguishing between food supplements and medicinal products. But in other constellations, too, difficult questions of demarcation arise, which must be answered with a view to legally compliant marketing.

    In a highly interesting case, the Administrative Court (Verwaltungsgericht) of Düsseldorf, Germany, recently had to classify a CBD-containing (Cannabidiol) mouth spray that was explicitly advertised by its manufacturer as a “cosmetic” and therefore not suitable for human consumption. The Ingredients of the product were labelled: « Cannabis sativa seed oil, cannabidiol from cannabis extract, tincture or resin, cannabis sativa leaf extract ».

    The Product is additionally also labelled as follows: “Cosmetic oral care spray with hemp leaf extract. » The Instructions for use are: « Spray a maximum of 3 sprays a day into the mouth as desired. Spit out after 30 seconds and do not swallow. »

    A spray of the Product contains 10 mg CBD. This results in a maximum daily dose of 30 mg CBD as specified by the company.

    At the same time, however, it was pointed out that the “consumption” of a spray shot was harmless to health.

    The mouth spray could therefore be consumed like a food, but was declared as a “cosmetic”. This is precisely where the court had to examine whether the prohibition order based on food law was lawful.

    For the definition of cosmetic products Article 2 sentence 4 lit. e) Regulation (EC) No. 178/2002 refers to Directive 76/768/EEC. This was replaced by Regulation (EC) No. 1223/2009. Cosmetic products are defined in Article 2(1)(a) as follows: “‘cosmetic product’ means any substance or mixture intended to be placed in contact with the external parts of the human body (epidermis, hair system, nails, lips and external genital organs) or with the teeth and the mucous membranes of the oral cavity with a view exclusively or mainly to cleaning them, perfuming them, changing their appearance, protecting them, keeping them in good condition or correcting body odours ”.

    Here too, it is not the composition of the product that is decisive, but its intended purpose, which is to be determined on the basis of objective criteria according to general public opinion based on concrete evidence.

    According to the system of Regulation (EC) No. 178/2002, Article 2 sentence 1 first defines foodstuffs in general and then excludes cosmetic products under sentence 4 lit. e). According to the definition in Regulation (EC) No. 1223/2009, cosmetic products must have an exclusive or at least predominant cosmetic purpose. It can be concluded from this system that the exclusivity or predominance must be positively established. If it is not possible to determine which purpose predominates, the product is a foodstuff.

    The Düsseldorf Administrative Court had to deal with this question in the aforementioned legal dispute brought by the distributor against an official prohibition order in the form of a so-called general ruling („Allgemeinverfügung“). By notice dated July 11, 2020, the competent authority issued a general ruling prohibiting the marketing of foodstuffs containing “cannabidiol (as ‘CBD isolates’ or ‘hemp extracts enriched with CBD’)” in their urban area. The company, based in this city, offered the mouth spray described above.

    In a ruling dated 25.10.2024 (Courts Ref. : 26 K 2072/23), the court dismissed the company’s claim. The court’s main arguments were :

    1. Classification as food: the CBD spray was correctly classified as food by the authority, as it was reasonable to expect that it could be swallowed despite indications to the contrary. According to an objective perception of the market, there is a now established expectation of an average informed, attentive and reasonable consumer to the effect that CBD oils are intended as “lifestyle” products for oral ingestion, from which consumers hope for positive health effects The labelling as “cosmetic” was refuted by the objective consumer expectations and the nature of the application.
    2. No medicinal product status: Due to the low dosage in this case (max. 30 mg CBD per day), the product was not classified as a functional medicinal product, as there was no sufficiently proven pharmacological effect.
    3. Legal basis of the injunction: The prohibition of the sale of the products by the defendant was based on a general order, which was confirmed as lawful by the court.

    In the ruling, the court emphasizes the objective consumer expectation and clarifies that products cannot be exempted from a different regulatory classification by the authorities or the courts solely by their labelling.

    Conclusion: The decision presented underlines the considerable importance of the “correct” classification of a health product in the respective legal product category. In addition to the classic distinction between foodstuffs (food supplements) and medicinal products, comparable issues also arise with other product types. In this case in the constellation of cosmetics versus food – combined with the special legal component of the use of CBD.

    Quick Summary: In Germany, on termination of a distribution contract, distribution intermediaries (especially distributors / franchisees) may claim an indemnity from their manufacturer / supplier if their position is similar to that of commercial agents. This is the case if the distribution intermediary is integrated into the supplier’s sales organization and obliged to transfer its customer base to the supplier, i.e. to transmit its customer data, so that the supplier can immediately and without further ado make use of the advantages of the customer base at the end of the contract. A recent court decision now aims at extending the distributor’s right to indemnity also to cases where the supplier in any way benefited from the business relationship with the distributor, even where the distributor did not provide the customer data to the supplier. This article explains the situation and gives tips on how to overcome the ambiguity that this new decision brings with it.

    A German court has recently widened the distributor’s right to goodwill indemnity at termination: Suppliers might even have to pay indemnity if the distributor was not obliged to transfer the customer base to the supplier. Instead, any goodwill provided could suffice – understood as substantial benefits the supplier can, after termination, derive from the business relationship with the distributor, regardless of what the parties have stipulated in the distribution agreement.

    The decision may impact all businesses where products are sold through distributors (and franchisees, see below) – particularly in retail (especially for electronics, cosmetics, jewelry, and sometimes fashion), car and wholesale trade. Distributors are self-employed, independent contractors who sell and promote the products

    • on a regular basis and in their own name (differently from commercial agents),
    • on their own account (differently from commission agents),
    • thus bearing the sales risk, for which – in return – their margins are rather high.

    Under German law, distributors are less protected than commercial agents. However, even distributors and commission agents (see here) are entitled to claim indemnity at termination if two prerequisites are given, namely if the distributor or the commission agent is

    • integrated into the supplier’s sales organization (more than a pure reseller); and
    • obliged (contractually or factually) to forward customer data to the supplier during or at termination of the contract (German Federal Court, 26 November 1997, Case No. VIII ZR 283/96).

    Now, the Regional Court of Nuremberg-Fürth has established that the second prerequisite shall already be fulfilled if the distributor has provided the supplier with goodwill:

    “… the only decisive factor, in the sense of an analogy, is whether the defendant (the principal) has benefited from the business relationship with the plaintiff (distributor). …

    … the principal owes an indemnity if he has a “goodwill”, i.e. a justified profit expectation, from the business relationships with customers created by the distributor.”

    (Decision of 27 November 2018, Case no. 2 HK O 10103/12).

    To support this wider approach, the court abstractly referred to the opinion by the EU advocate general in the case Marchon/Karaszkiewicz, rendered on 10 September 2015. That case, however, did not concern distributors, but the commercial agent’s entitlement to an indemnity, specifically the concept of “new customers” under the Commercial Agency Directive 86/653/EEC.

    In the present case, it would, according to the court, suffice that the supplier had the data on the customers generated by the distributor on his computer and could freely make use of them. Other cases where the distributor indemnity might arise, even regardless of the concrete customer data, would be cases where the supplier takes over the store from the distributor, with the consequence of customers continuing to visit the very store also after the distributor has left.

    Practical tips:

    1. The decision makes the legal situation with distributors / franchisees less clear. The court’s wider approach needs, however, to be seen in the light of the Federal Court’s case law: The court still in 2015 denied a distributor the indemnity, arguing that the second prerequisite was missing, i.e. that the distributor was not obliged to forward the customer data (decision of 5 February 2015, case no. VII ZR 315/13, following its earlier decision re Toyota, 17 April 1996, case no. VIII ZR 5/95). Moreover, the Federal Court also denied franchisees the right to indemnity where the franchise concerns anonymous bulk business and customers continue to be regular customers only de facto (decision of 5 February 2015, case no. VII ZR 109/13 re bakery chain “Kamps”). It remains to be seen how the case law develops.

    2. In any case, suppliers should, before entering the German market, consider whether they are willing to take that risk of having to pay indemnity at termination.

    3. The same applies to franchisors: franchisees will likely be able to claim indemnity based on analogue application of commercial agency law. Until today, the German Federal Court of Justice has denied the franchisee’s indemnity claim in the single case and therefore left open whether franchisees in general could claim such indemnity (e.g. decision of 23 July 1997, case no. VIII ZR 134/96 re Benetton stores). Nevertheless, German courts could quite likely affirm the claim in the case of distribution franchising (where the franchisee buys the products from the franchisor), provided the situation is similar to distributorship and commercial agency. This could be the case where the franchisee has been entrusted with the distribution of the franchisor’s products and the franchisor alone is entitled, after termination of contract, to access the customers newly acquired by the franchisee during the contract (cf. German Federal Court, decision of 29 April 2010, Case No. I ZR 3/09, Joop). No indemnity, however, can be claimed where

    • the franchise concerns anonymous bulk business and customers continue to be regular customers only de facto (decision of 5 February 2015 re the bakery chain “Kamps”);
    • or production franchising (bottling contracts, etc.) where the franchisor or licensor is not active in the very sector of products distributed by the franchisee / licensee (decision of 29 April 2010, Case No. I ZR 3/09, Joop).

    4. The German indemnity for distributors – or potentially for franchisees – can still be avoided by:

    • choosing another law that does not provide for an indemnity;
    • obliging the supplier to block, stop using and, if necessary, delete such customer data at termination (German Federal Court, decision of 5 February 2015, case no. VII ZR 315/13: “Subject to the provisions set out in Section [●] below, the supplier shall block the data provided by the distributor after termination of the distributor’s participation in the customer service, cease their use and delete them upon the distributor’s request.“). Though such contractual provision appears to be irrelevant according to the above decision by the Court of Nuremberg, the court does not provide any argument why the established Federal Court’s case law should not apply any more;
    • explicitly contracting the indemnity out, which, however, may work only if (i) the distributor acts outside the EEA and (ii) there is no mandatory local law providing for such indemnity (see the article here).

    5. Further, if the supplier deliberately accepts to pay the indemnity in return for a solid customer base with perhaps highly usable data (in compliance with the EU General Data Protection Regulation), the supplier can agree with the distributor on “entry fees” to mitigate the obligation. The payment of such entry fees or contract fees could be deferred until termination and then offset against the distributor’s claim for indemnity.

    6. The distributor’s goodwill indemnity is calculated on basis of the margins made with new customers brought by the distributor or with existing customers where the distributor has significantly increased the business. The exact calculation can be quite sophisticated and German courts apply different calculation methods. In total, it may amount up to the past years’ average annual margin the distributor made with such customers.

    The legal form of a GmbH (limited liability company) is very popular in Germany and is also one of the most frequently chosen forms of market entry for foreign investors. Its establishment is relatively simple and quick, the GmbH offers shareholders the desired limitation of liability and enjoys a high reputation in business relations, both in Germany and abroad. The statutory minimum share capital of 25,000 euros documents a certain seriousness and is intended to protect creditors.

    However, the opening of a German bank account to which the shareholders are to pay their capital contributions is usually a factual problem when setting up a GmbH; the capital stock must be provided before the company is registered in the German commercial register. On the one hand, it is not uncommon for German financial institutions to refuse to open accounts to foreign shareholders per se. On the other hand, it is almost standard today that the opening of a bank account for a new company in which foreign shareholders are to hold shares can take several weeks for various internal bank reasons. In practice, this means that the entry of the company in the commercial register can be suspended for several weeks or even months. Valuable time is lost, especially if you are about to start a project in Germany and everything is already prepared.

    Do you have to accept this unnecessary delay? No, not at all.

    There is a much faster and more acceptable way.

    A bank account is not required for the establishment of a GmbH. The German corporate law does not provide for this either. In practice, however, it has become common to open an account directly when a company is established. Of course, this only makes sense if the account is opened quickly and immediately. If, however, it is foreseeable in advance that there might be problems opening an account with a German bank, a different procedure is recommended.

    The managing director of the newly established GmbH (he is usually already appointed during the notarial establishment of the company) has to assure in the registration of the new company to the commercial register that the capital contributions are in the free and unrestricted disposal of the management. The law does not stipulate that this can only take place if the payment is made to a bank account of the GmbH. It is also possible and permissible for the managing director to opens a company cash box (cash register) in which the shareholders hand over the capital contributions in cash and the managing director notes the payment in the cash book. A copy of the cash book or a confirmation of the managing director can be handed over to the notary as proof of the payment, who then also forwards this copy to the commercial register.

    In the incorporation practice and experience of the author, this procedure has so far been accepted by the commercial registers without objection. All GmbHs founded in this way were successfully registered.

    The author of this post is Dominik Wagner.

    To create a homogeneous franchise system where all franchisees have to comply with the same requirements, franchisors typically use standard form franchise contracts – i.e. contracts pre-formulated drafted and provided by the franchisor for a multiple number of franchisees.

    Within Germany, such franchise contracts have to comply with the quite strict German laws on standard form contracts (even in B2B). As a rule of thumb, such standard form contracts must be reasonable in order to be valid. Vice versa, they are void if they unreasonably disadvantage the franchisee, especially if

    • they are not compatible with essential principles of law, or
    • restrict essential rights or duties arising from the nature of the franchise contract to such an extent that the contractual purpose is endangered.

    The same goes for handbooks, guidelines or other manuals: they all qualify as standard form contracts under German law (sec. 305 (1) German Civil Code [“BGB”]).

    Moreover, franchise contracts must not excessively restrict the franchisee’s economic freedom. Worst case risk – as recently reconfirmed by the Federal Court –: the entire franchise contract is void!

    “A franchise agreement is null and void in its entirety because of infringing sec. 138 BGB if the franchisee’s economic freedom is excessively impaired due to a large number of provisions which advantage the franchisor unilaterally and disadvantage the franchisee, for which no even approximately appropriate compensation is granted to the franchisee (…). This requires an overall assessment of the contractual agreement and the circumstances leading to the conclusion of the contract. Indications of an immoral gagging of the franchisee may be a provision with stipulates the franchisor’s authority to collect debts, thus enabling the franchisor to redirect payments to the franchisor, as well as contractual provisions restricting the franchisee’s economic freedom beyond what is typical for such a distribution system.”

    (Decision of 11.10.2018, Case No. VII ZR 298/17, para. 17 [own translation] – regarding a “licensing contract” for realtors).

    Practical advice

    1. This new decision by the Federal Court confirms the rather restrictive, rather franchisee-friendly decisions handed down by German courts in the past (e.g. the Federal Court’s Decision on fast food chains of 12.11.1986, Case No. VIII ZR 280/85, para. 10).
    2. To minimize the risk of invalidity, franchisors ideally observe the relevant statutory requirements on standard form contracts and the relevant case law on franchise contracts. According to the latest decision above, special care should be taken when the franchise contract provides for the franchisor’s power to collect debts. A way out could be the choice of another law – if the franchisor is based outside Germany (cf. Art. 3 Rome-I-Regulation).
    3. For guidance on franchisors’ advertising and pricing campaigns and compliance with antitrust law, check out the article “Franchise systems: ad campaigns with low prices can come costly!”.

    Franchisors may run ad campaigns with low prices. Such campaigns, however, can come costly if they have an anticompetitive effect, especially if they factually force the franchisees to offer the products for the low prices.

    Best example: pricing campaigns for the “burger of the week”, as decided by the Munich Regional Court in its decision of 26 October 2018 (Case No. 37 O 10335/15).

    The situation

    The plaintiffs are franchisees of the defendant’s franchise network, a restaurant chain. In addition to the obligation to pay “royalties” in return for the use of the franchise systems and its trade marks (5%), the franchise agreements also obliged the franchisees to pay a sales-related advertising fee. The defendant and franchisor used the advertising fees of the franchisees, among others, to advertise products from the plaintiffs’ menu at low prices, e.g. under the slogan “King of the Month“. By participating in the advertising campaigns and its low prices, the sales of the franchisees increased and thus the franchise fee they had to pay. After some time, the franchisees decided that this advertising campaign caused them financial damage – because the products offered for a low price affected the sale of products offered at a normal price (“cannibalism effect”). They no longer participated in the campaign and demanded an appropriate reduction of their advertising fee. Among other things, they brought an action for an injunction against the use of the advertising fee for the campaign complained of and for a declaratory judgment of the liability to pay damages. The Regional Court granted both motions.

    The main reason. The advertising campaigns had the effect of restricting competition, namely the franchisees’ ability to determine their sale prices (contrary to sec. 1 and 2 (2) German Act against Restraints of Competition and Art. 2 (1), Art. 4 a) Vertical Block Exemption Regulation). After all, the franchisor set – so the court – the resale price through the de facto binding effect of the ad campaign.

    The decision stands in line with the previous case law, especially of the German Federal Court’s decisions on low-price campaigns by franchisors of

    • self-drive rental vehicles (“Sixt ./. Budget”, 02.02.1999, Case No. KZR 11/97, para.30),
    • pet food (“Fressnapf”, 04.02.2016, Case No. I ZR 194/14, para. 14), and
    • glasses within a dual distribution system where the franchisor sold the products through its own branches and through franchisees without differentiating between branch and franchise operations (“Apollo Optik”, 20.05.2003, Case No. KZR 27/02, para. 37).

    Practical tips

    1. Obligations that are essential for running the franchise system do not restrict competition for the purposes of the EU antitrust rules (similar to the US law’s “ancillary restraints doctrine”). In particular, the following restrictions are typically indispensable components of a functioning franchise agreement:
    • Restrictions of the transfer of know-how;
    • Non-compete obligations (during and after the term of the agreement), prohibiting the franchisee from opening a shop of the same or similar nature in an area where he may compete with other members of the franchise network;
    • Obligations of the franchisee not to transfer his shop without the franchisor’s prior approval.

    (cf. EU Court of Justice, 28.01.1986, Case “Pronuptia”, Case No. 161/84 para. 16. 17).

    1. However, franchise systems are not per se exempted from the prohibition of restricting competition. Therefore, watch out to comply with the EU antitrust rules to avoid painful fines and ensure that the franchise agreement can be enforced.
    2. The prohibition of price-fixing (or Resale Price Maintenance) applies to the relationship between franchisor and franchisee if the franchisee bears the economic risk of its enterprise. To avoid that an ad campaign with recommended resale prices constitutes an anticompetitive price-fixing, the concrete situation needs to be assessed thoroughly. What helps to avoid also any factual binding effect:
    • Add a clarifying note: “Only at participating restaurants in … . As long as stocks last.”
    • Ensure that such note is clearly visible, e.g. by adding an asterisk “*” to the price.
    • Avoid any measures that could be interpreted as pressure or incentive for the franchisees and which would turn the recommended price into a fixed price (e.g. because other pricing would otherwise lead to negative evaluations).
    1. Such ad campaigns may work, as a UK court’s decision shows: According to the BBC, Burger King franchisees sued the franchisor in 2009 “because a corporate promotion required franchisees to sell a double cheeseburger for $1 that cost a $1.10 to make. The court ruled for Burger King.” Under the above circumstances and also for short-term promotions, franchisors may even impose the resale price – such campaigns just need to be well prepared.
    2. For an overview on resale price maintenance, see the Legalmondo article Resale Price Maintenance and Exceptions for short-term promotions.
    3. Resale Price Maintenance can come costly – in 2018, the European Commission imposed fines of EUR 111 million in total on four consumer electronics manufacturers – Asus, Denon & Marantz, Philips and Pioneer – for fixing online resale prices (cf. the Press release of 24 July2018).

    “Luxury goods justify online sales bans” on third party platforms – as stated in the press release no. 30/2018 of the Higher Regional Court of Frankfurt of July 12, 2018. After the long-awaited Coty-ruling of the ECJ (see the article of December 2017, https://www.legalmondo.com/2017/12/eu-court-justice-allows-online-sales-restrictions-coty-case/), the Higher Regional Court of Frankfurt has now applied the ECJ’s guidelines to Coty’s ban of sales via third party platforms and declared it effective – which was actually expected (I). Other high-quality goods – also outside the luxury segment – can justify platforms bans as well – at least this was decided by the Court of Appeal of Hamburg with regard to an eBay ban (II.). The article ends with some practical conclusions (III.).

    Luxury products justify platform bans

    According to the judgment of the Frankfurt Court of Appeal, Coty can prohibit the distributor from selling its products via third party platforms. Based on Coty’s wording in the selective distribution agreement, however, any distributor is free to establish advertising cooperations with third party platforms, where customers are redirected to the distributor’s own online shop. According to the judgment, the online marketplace ban is already admissible under the EU Vertical Block Exemption Regulation, since it does not constitute a hardcore restriction. The distribution ban could possibly even be exempted from the cartel prohibition, in the field of selective distribution; in this case, it would only be doubtful whether the prohibition of all “sales cooperation with a third party platform, outwardly recognisable from others, regardless of its concrete structure, would be a reasonable mean for the intended aim” (translated text from the original German version), i.e. whether it would be proportionate or whether there would be other means, less interfering with the dealer’s competitiveness. This question was left open by the Court.

    Also other high-quality goods may allow platform bans

    The case decided by the Hamburg Higher Regional Court (decision of March 22, 2018, file no. 3 U 250/16) concerns a qualitative selective distribution system for food supplements and cosmetics, which runs via the so-called network marketing, as well as via internet. The distribution guidelines contain, among other things, specific indications regarding the distributor’s website, the contact possibilities for customers in accordance with the “principle of personal sales of goods” (since the distribution system aims to sell the product tailored to the customers’ personal needs based on personal advice), as well as the quality of information and the product presentation. The “distribution … via eBay and comparable e-commerce platforms” is expressly prohibited, as it does not meet the quality requirements, at least not “according to the current state” (translated text from the original German version).

    The Court of First Instance considered the platform ban to be admissible (District Court of Hamburg, judgment of November 4, 2016, Case No. 315 O 396/15) – which has now been confirmed by the Higher Regional Court of Hamburg. This is because qualitative selective distribution systems are not only admissible for luxury goods and high-technology goods, but also for (other) high-quality goods, “if the goods sold are high-quality and the distribution is combined with parallel customer consulting and support services, with the aim, among other things, of illustrating to the customer an overall sophisticated, high-quality and upscale end product and building up or maintaining a specific product image” (translated text from the original German version).

    Within such a selective distribution system for the distribution of food supplements and cosmetics, it could then be admissible “to prohibit the distribution partners, by means of suitable company guidelines, from selling those goods via a specific online sales platform, in order to preserve the product image and the related practice of customer-binding support, as well as to prevent product- and image-damaging business practices of single distribution partners as occurred and consequently pursued in the past” (translated text from the original German version).

    The peculiarity here was that they were not “pure prestige products” and, moreover, the Hamburg Higher Regional Court did not limit itself to the – in view of the market shares readily feasible – verification that the platform under Article 2 of the Vertical Block Exemption Regulation was admissible. Rather, the Court vividly and precisely declined the so-called Metro criteria.

    Practical conclusions

    1. The Internet remains a growth driver for consumer goods, as also the market data from the German Trade Association confirm: “E-commerce remains a growth driver“.
    2. At the same time, brand manufacturers in particular want growth to be regulated according to the rules of their distribution system and to their requirements. These include, especially for luxury and technically sophisticated products, as well as other products requiring intensive assistance, strict specifications regarding brand identity and advertising appearance (specifications regarding brick store clauses, marketplace bans) and the services to be offered (e.g. chat and / or hotline with information on availability).
    3. Manufacturers should check whether their platform bans comply with ECJ’s requirements or if they wish to impose platform bans – in selective, exclusive, franchise and open distribution.
    4. Who wants to take as little risk as possible, should remain cautious with platform bans outside the selective distribution of luxury goods. In its first reaction, also the Federal Cartel Authority (BKartA, short for “Bundeskartellamt”) declared that the Coty-ruling should apply exclusively to original luxury products: “#Brand manufacturers still have no carte blanche on #platform bans. First assessment: “Limited impact on our practice” (BKartA on Twitter, December 6, 2017). Nevertheless, the European Commission has now spoken against this: in its Competition Policy Brief of April 2018 (“EU competition rules and marketplace bans: Where do we stand after the Coty judgment?), the European Commission states – rather incidentally – that the argumentation of the ECJ in the Coty case should also apply regardless of the luxury character of the distributed products:

    „The arguments provided by the Court are valid irrespective of the product category concerned (i.e. luxury goods in the case at hand) and are equally applicable to non-luxury products. Whether a platform ban has the object of restricting the territory into which, or the customers to whom the distributor can sell the products or whether it limits the distributor’s passive sales can logically not depend on the nature of the product concerned.“

    In fact, the ECJ has broadly defined “luxury goods” in its judgment: namely as goods whose quality is “not just the result of their material characteristics” but of intangible values – which is usually the case for branded goods (see the Coty-judgment of the ECJ of December 6, 2017, para. 25 and, with regard to “quality goods”, the conclusion of the EU Advocate General of July 26, 2017, para. 92). Furthermore, the ECJ only requests that the goods be bought “also” because of their prestige character, not “alone” or “above all” because of it. In conclusion, a lot of aspects suggest that all brand manufacturers can include platform bans in their distribution agreements – at least in case of market shares up to max. 30%.

    1. Those who are not afraid of confrontations with dealers and antitrust authorities can definitely impose platform bans outside the selective distribution of luxury goods as well – or increasingly rely on premium products and luxury – such as at the perfumery chain Douglas (see the Süddeutsche Zeitung of March 8, 2018, p. 15: “Active and unconventional, Tina Müller ends discounts on Douglas and aims at luxury“).
    2. To ensure consistent quality of sales, specific quality targets are recommended, especially for online sales. The list of possible quality targets is very long. The specifications that have proven to be best practice concern in particular:

    – the positioning as a retailer (platform, product range, communication)

    – the design of the website (quality, look & feel, etc.)

    – the content and product offer of the website,

    – the processing of online purchases,

    – the consulting and customer service, as well as

    – the advertisement.

    1. It is also essential to note that manufacturers are not allowed to totally prohibit distributors from selling online; nor are sales requirements allowed to amount to such a total ban – as the Courts now see in the case of Ascis’ ban of price comparison engines (to this regard, see the following article from April 2018: https://www.legalmondo.com/2018/04/germany-ban-of-price-comparison-engines-and-advertising-on-third-party-platforms/).
    2. Further details can be found in German in the following Law Journals:

    – Rohrßen, Vertriebsvorgaben im E-Commerce 2018: Praxisüberblick und Folgen des „Coty“-Urteils des EuGH, in: GRUR-Prax 2018, 39-41;

    – Rohrßen, Internetvertrieb von Markenartikeln: Zulässigkeit von Plattform-verboten nach dem EuGH-Urteil Coty, in: DB 2018, 300-306;

    – Rohrßen, Internetvertrieb: „Nicht Ideal(o)“ – Kombination aus Preissuchma-schinen-Verbot und Logo-Klausel, in: ZVertriebsR 2018, 120-123;

    – Rohrßen, Internetvertrieb nach Coty – Von Markenware, Beauty und Luxus: Plattformverbote, Preisvergleichsmaschinen und Geoblocking, in: ZVertriebsR 2018, 277-285.

    On 1 January, the new Packaging Act (“Verpackungsgesetz”) will replace the existing Packaging Ordinance (“Verpackungsverordnung”). Non-compliance with the new rules may have very unpleasant consequences.

    For those who sell packaged goods to end consumers in Germany it is high noon: they have to adapt to the new packaging law, which comes into force on January 1, 2019.

    The main objective of the new law is that in the future all concerned parties will have to take responsibility and bear the costs of disposing their packaging. The legislator also wants to achieve the increase of the recycling rate of paper, plastic, metal or glass packaging, and to use as many readily recyclable materials as possible. Therefore, the fee that producers or distributors must pay for disposal will in future not only depend on the quantity and material type, but also more on the recyclability of the packaging.

    Who is affected by this law?

    Manufacturers, online dealers and distributors of packaged goods of all kinds.

    Affected are all so-called initial distributors of packaging, which typically end up at the private end consumer. These can be manufacturers, online dealers and distributors of packaged goods of all kinds, whether food, electrical appliances or furniture.

    All of them, if they place packaging on the market for the first time, must register with one of the dual systems already today and, depending on the quantity and material of the packaging waste, pay a participation fee to the German take-back system.

    It is new from next year on that they additionally have to register with the Central Agency Packaging Register and specify the amount of waste.

    This information will be publicly available. By doing so, the legislator wants to create transparency and ensure that all those who place “packaging” on the market fulfill their obligations.

    Also new is that the fees, which so far have been simply calculated according to quantity and type of material, should in future also depend on how well a material can be recycled.

    For example: Cardboard boxes, which usually consist of two-thirds of waste paper, are easily recyclable, as are aluminium cans, which can be reused to 100 percent. By contrast, the notorious coffee-to-go cups are not recyclable because they consist of a quasi-inseparable composite material.

    How exactly the gradations will look is not yet certain, as the dual systems still work on the implementation.

    Further innovations for beverage manufacturers and distributors

    The law contains several other changes that are particularly important for beverage manufacturers and distributors. The compulsory deposit for disposable containers will be extended to include a few types of beverages that were previously exempted, such as carbonated fruit and vegetable nectars. A new duty has been introduced for retailers, who must point out “with clearly visible signs” on disposable and reusable beverage packaging.As from 1st of January 2019 companies must also file the so-called Declaration of Compliance (“Vollstaendigkeitserklaerung”) with the Central Agency Packaging Register and not anymore with the respective local Chamber of Industry and Commerce.

    What is the Declaration of Compliance?

    A Declaration of Compliance is a verification concerning the volumes of sales packaging placed into the market by a manufacturer / distributor within one calendar year.

    The filing of the Declaration of Compliance, however, only affects larger manufacturers, since the de minimis limits are set quite high in this respect. For paper, cardboard or carton it is about 80 tons per year.

    Pre-registration is already possible as from September 2018. It is important to note, however, that every company involved in the system must perform the registration and data reporting “personally”, meaning that this process may not be transferred to third parties.

    The respective database run by the Central Agency Packaging Register is called LUCID. Manufacturers, online dealers or initial distributors who preregister with LUCID will receive a provisional registration number, which will be sent to the Dual system with which they can sign a contract. There are currently nine companies offering this. Manufacturers who preregister in 2018 will automatically receive a registration confirmation from the Central Agency Packaging Register at the beginning of 2019. The registration including the indication of quantities is free and can be done online.

    The Central Agency Packaging Register is also responsible to monitor compliance with the regulations. However, at the end of the day, everyone can check the respective compliance as LUCID is a transparent register and open to everyone to search the register for specific manufacturers and brands.

    The law explains why this can have quite unpleasant consequences:

    In case the registration is omitted, there is automatically a ban on distribution of the packaging and there is a threat of fines to be imposed which may range up to 100.000 €! Due to the publicity of the register, agents not complying with the law may have to expect that their goods will be discontinued in the German trade.

    Still unclear issues

    The definition of packaging covered by this law is not quite clear. Transport packaging such as that used by a manufacturer for delivery to the dealer and disposed of there, for example, is not affected by the obligation to participate at the system and the new registration obligation. This packaging does not end up at the private end consumer. But what about wine boxes, for example? They are often only transport packaging, but some customers may take a whole box of their favorite wine with them. In addition, hotels and restaurants, such as those supplied by a retailer, are considered by law to be private end consumers.

    The author of this post is Olga Dimopoulou

    Commercial agents are very suitable for expanding one’s business into new markets – especially for two reasons: First, because they generally have a good expertise of the market (especially if they reside in that country). Second, because their remuneration (“commission”) can be configurated completely profit-oriented (= remunerated only if they successfully negotiate a new transaction), and related to the turnover they generate.

    Nevertheless, both the supplier and the commercial agent may feel the need for an initial period, in which both get to know each other, the product, the market and the customers as good as possible to subsequently evaluate how to proceed on that market. Therefore, they may agree on a trial period within which the commercial agency contract can be terminated more easily and sooner than without or after such trial period, e.g.:

    “This Agreement shall come into effect on [●] and shall be in force for a trial period of [●] months (“Trial Period”) during which each Party can terminate the Agreement with [●] months written notice. After such Trial Period, the Agreement shall continue indefinitely, unless terminated according to the rules below.”

    Even if the agency agreement is terminated within such trial period, however, the agent may be entitled to indemnity or compensation – as the Court of Justice of the EU just now confirmed (Case Conseils et mise en relations (CMR) SARL, decision of 19 April 2018, C-645/16).

    The court basically argues with the wording, context and objective of the Commercial Agency Directive:

    • The Commercial Agency Directive also applies to ‘”trial periods”.
    • Ending a commercial agency contract – even within an agreed trial period – constitutes a “termination” of the agency contract, which triggers the claims for indemnity or compensation – because the commercial agency contract has already been definitively concluded (understanding contrary to French case law, e.g. Cour de Cassation, Case No. 14-17894).
    • Goodwill indemnity or compensation are not forfeited because termination within the trial period is not included in the exhaustive list of exceptions in Article 18 Commercial Agency Directive.
    • The parties may derogate from the commercial agent’s mandatory rights only from the end of the contract (Article 19 Commercial Agency Directive) because the Commercial Agency Directive aims to protect the commercial agent vis-à-vis the principal (recital 2 of the Commercial Agency Directive).

    Practical tips

    1. Parties are free to agree on trial periods because it is covered by freedom of contract.
    2. At termination, the commercial agent is, as a matter of principle, entitled to an indemnity or compensation – to “indemnify the agent for his past services from which the principal will continue to benefit beyond the termination”, as the EU Court of Justice now put it. Whether the agent can claim indemnity or compensation depends on the law chosen by the parties (or, in absence of choice, by the law of the country where the commercial agent has his habitual residence).
    3. As far as the indemnity (payable e.g. according to German law) is concerned, its amount strongly depends on the commercial agent’s performance during the term of the contract – because the claim accrues if and to the extent that (i) the agent has brought the principal new customers or (ii) has significantly increased the business with existing customers and (iii) the principal continues to derive substantial benefits from such business, plus (iv) such indemnity must be equitable. As a maximum, the indemnity shall not exceed of the past five years’ average annual remuneration (including commissions and other payments). Such possible costs should therefore be included in one’s business planning before starting to distribute products or services through commercial agents.
    4. Throughout the EU, agency agreements are widespread in a vast variety of industries: roughly 740,000 commercial agents operate for 1.7 million companies and generate sales of EUR 260 billion. These figures from 2012 keep growing as indicate Eurostat’s data, reported by the European Commission in its Refit Evaluation. The EU Member States with the most commercial agents are Slovakia (35k) Czech Republic (42k), Germany (42k), France (50k), Spain (50k) and – by far – Italy (220k). If the agent operates outside the European Economic Area, Principals and commercial agents are free to derogate even from the otherwise mandatory Commercial Agency Directive, especially if German law is chosen. For details, please see the article “Commercial Agents outside the EEA – No Goodwill Indemnity (Ingmar reloaded)”.
    5. Alternatively, one can also do business through distributors or franchisees or other intermediaries – where, however, an indemnity may arise at well, especially vis-à-vis distributors. For details, see the article “German Distributor Indemnity – How to avoid it”.

    Benedikt Rohrssen

    Practice areas

    • Agency
    • Distribution
    • e-commerce
    • Franchising
    • Investments
    Contact Benedikt